Crypto Tax Definition Unresolved as US Infrastructure Bill Passed
VYSYN Ventures Weekly Insights #75 - U.S. President signs infrastructure bill into law but leaves room for debate
On Monday, November 15th, 2021, President Joe Biden signed a $1 trillion infrastructure bill into law. The bill, which aims at creating jobs across the country, will help disperse billions of dollars across states and local governments for specific construction and the provision of broadband internet infrastructure.
The bill raised debates and controversy, especially in the area of crypto tax and how it will be implemented. In the latest VYSYN Release, we examine certain aspects of this bill that have been passed into law surrounding the use of cryptocurrencies. We also highlight how members of the crypto community are reacting to this latest development.
Infrastructure bill raises crypto compliance concerns
After months of debate, the infrastructure bill was passed by the U.S. House of Representatives on November 6th, 2021, following a keenly contested voting process. The bill is considered an ambitious, “once-in-a-generation” spending measure that will facilitate the construction of major infrastructure across the U.S.
As far as the crypto industry is concerned, the cryptocurrency tax reporting provision has caused much consternation amongst observers. The bill requires “brokers” to report cryptocurrency gains and identification details of their clients to the government. Aside from the fact that this sort of centralized control flies against the ethos of the cryptocurrency industry, there is another issue. The definition of who qualifies as a broker is too broad.
Observers speculate that the new rules could target entities without customers, and other ancillary support members of the crypto industry such as miners and developers, thus making it impossible for them to comply with the law. Treasury officials have gone to great lengths to mention that the bill’s intention is to lay groundwork for future research from the government’s side into the nature of the crypto markets.
The government has announced it will not target miners and developers as a part of this bill and aims to conduct research into figuring out who qualifies and who doesn’t under the new regime. This review could take years and mainstream experts believe cryptocurrency investors have nothing to fear.
Government lacks understanding of crypto complexities
From an investor’s perspective, tracking and reporting crypto gains is complicated. Exchanges are currently tasked with reporting transactions occurring on their platforms. However, not all crypto transactions occur on an exchange. Investors who use cold wallets to store their coins don’t rely on exchanges, and this is before the subject of P2P transactions is considered.
For such users, Shehan Chandrasekera, Certified Public Accountant and Head of Tax Strategy at CoinTracker, explains that reporting their crypto dealings will be inaccurate for the most part. After all, exchanges will have a less than full view of these users’ transitions. The fear is that the government is creating more loopholes with these new laws.
Another area of concern for the cryptocurrency community is the issue of user privacy. A section of the infrastructure bill requires people who receive more than $10,000 in cash or its equivalent to file a report with the IRS. This report will include the full details of who made such payments to them, including their names and social security numbers. Failure to provide such a report is now considered a felony offense.
For crypto users this is a major concern. First, it goes against the reason cryptocurrency and decentralized networks exist. Second, not every crypto transaction contains details for the remitting party. On P2P exchanges and other off-exchange transactions, the sender’s wallet ID is the only identifying information.
In such cases, users will inadvertently end up not complying with the law when reporting these transfers. Given the felony offence statute attached to this offense, the government is likely incentivizing people to neglect reporting these transactions.
Government needs to consult widely
Critics of this bill have suggested that more experts should have been included in putting together this proposal, especially since emerging technologies like cryptocurrencies are a part of the bill. Industry practitioners could have provided a clear perspective of what is achievable but the government appears to have neglected this advice.
Justin Banon, the Co-Founder of Boson Protocol, a decentralized commerce protocol, thinks that people who understand the threats, opportunities, and economic implications presented by the technologies themselves needed to be part of the process in developing the bill. “In a global economy, regulating through fear and ignorance rather than regulating with understanding will simply drive the next wave of web innovation away from the US to other jurisdictions that are implementing smart and informed regulation,” he said.
This sentiment was shared by Dr. Amber Ghaddar, co-founder of AllianceBlock. She believes that the government needs to step away from its old ways and work towards wider consultations, especially when issues relating to recent technologies are involved.
Ghaddar noted that applying the ‘letter of antiquated laws’ and provisions to a new industry showed a lack of understanding from the government. However, she put the responsibility on the cryptocurrency community to promote a closer working relationship. Though still in its developmental stages, the digital assets industry has entered mainstream society to the extent that its role must be considered at all times.
The emergence of DeFi further increases the link between cryptocurrencies and mainstream finance. Therefore, it is necessary to build a bridge that would close the gap between government regulatory agencies and the crypto industry. This will enable a mutually beneficial union between both sides of the economy.
About VYSYN Ventures
VYSYN Ventures is a longstanding venture capital company that specializes in funding and supporting disruptive startups in the blockchain and cryptocurrency industry. We have provided early-stage support to several projects that have grown to USD market capitalizations of hundreds of millions and even billions. Our incubation program focuses on providing capital allocations, versatile marketing support, and tech assistance.